One important aspect of manufacturing is maintaining a reliable and predictable supply chain of components from suppliers to manufacturers. A typical supply chain requires the involvement and coordination of several different participants. These participants typically include one or more of each of the following: (1) suppliers; (2) third party logistics providers (3PL's); (3) contract manufacturers; and (4) Original Equipment Manufacturers (OEM's). These different participants are discussed briefly below.
OEM's are manufacturers and distributors of products. OEM's have traditionally manufactured at least some of their products in-house, but there is a trend to outsource more manufacturing work to contract manufacturers. Dell and Compaq are examples of OEM's.
Suppliers typically manufacture component parts that are needed to produce a larger product. An example of a well-known component supplier is Intel, a company that produces microprocessors and other components that are used within larger electronic devices, such as personal computers and servers.
Third party logistics providers are third party companies (such as UPS Supply Chain Solutions) that coordinate the shipping of parts from suppliers to manufacturers. These “3PL's” often maintain warehouse facilities (such as proximity hubs) for storing components before the components are needed by manufacturers.
Contract manufacturers are manufacturers who perform manufacturing work on a contractual basis. These contract manufacturers have historically produced sub-assemblies for use in larger products, but now also commonly produce finished products (such as personal computers and servers) for OEM's, which then distribute the products. Solectron, Flextronics, and Celestica are examples of contact manufacturers.
Ideally, a supply chain would be coordinated so that a dependable stream of parts would be shipped from a supplier to a manufacturer (for example, a contract manufacturer or OEM) so that parts would always arrive at the precise moment that the parts are needed at the assembly line. This ideal supply chain would also be structured so that the manufacturer would always have sufficient parts to manufacture products at the manufacturer's desired rate without interruption.
Of course, due to the realities of the manufacturing and logistics worlds, such an idealized situation would be difficult, if not impossible, to achieve. This is due, in part, to fluctuations in supply and demand for both the component parts produced by the supplier and for the finished items produced by the manufacturer. The unpredictability typically associated with shipping parts over long distances has also made it difficult to attain the idealized logistics situation described above.
These real-world uncertainties have resulted in unpredictable supply streams in which it is difficult to determine exactly when parts will arrive at a given manufacturing plant (or at a local storage facility, such as a proximity hub, associated with the manufacturing plant). Accordingly, to avoid any interruption in manufacturing production due to lack of parts, manufacturers typically maintain a stockpile of parts called “safety stock” at a local storage facility (such as a proximity hub) close to the manufacturing plant.
As will be understood by one skilled in the relevant field, the amount of safety stock that a manufacturer needs to have available near a manufacturing facility (e.g., a manufacturing plant) in order to assure uninterrupted operation of their manufacturing facilities is directly related to the predictability of the supply of products to the manufacturing facility (or a warehouse close to the manufacturing facility). For example, if a manufacturer can rely on needed parts to arrive within a two day delivery window, the manufacturer may only need to keep a two to three day safety stock of parts on hand. However, if the manufacturer can only rely on needed parts to arrive within a seven day delivery window, the manufacturer would need to keep a significantly larger safety stock on hand to assure uninterrupted operation of the manufacturing facilities.
In recent years, demand for electronic components has been relatively low. This has provided manufacturers with increased market power in negotiating the terms of supply agreements with component manufacturers. As a result, manufacturers have begun to demand that suppliers enter into Vendor Managed Inventory (VMI) agreements (also known as Supplier Managed Inventory (SMI) agreements) in which the supplier maintains a sufficient safety stock of the supplier's parts in a warehouse (called a proximity hub, or a VMI) within a short distance of each of the manufacturer's manufacturing facilities.
Under the terms of a typical VMI agreement, the supplier must maintain an amount of safety stock within each proximity hub that is sufficient to assure that operations at the neighboring manufacturing facility will not be interrupted due to lack of the supplier's parts. Typically, ownership of these parts is not transferred from the supplier to the manufacturer until the manufacturer requests (or “pulls”) the parts from the supplier. This forces the suppliers to bear the cost and risk of maintaining the manufacturer's safety stock (and of maintaining this inventory on their books), and to dedicate an often unnecessarily excessive amount of stock to a single manufacturing facility.
Current VMI arrangements are advantageous to manufacturers because: (1) there is a significant reduction in component inventory because the supplier is forced to maintain this inventory; and (2) the close proximity of the proximity hubs to the factory ensures production continuity and upside protection. Current VMI arrangements provide at least one advantage to suppliers in that they allow for “actual usage” visibility, which improves inventory forecast accuracy for the supplier.
Understandably, because current VMI practices are unfavorable to suppliers, very few suppliers are willing to agree to such arrangements. In addition, it is expected that, as demand for component parts increases, even fewer (if any) suppliers will be willing to agree to these prior art VMI arrangements.
One particular disadvantage of current VMI systems is lack of visibility. It is currently common for a given supplier to supply parts to proximity hubs that are run by many different 3PL companies. These 3PL companies can range in sophistication from large, sophisticated 3PL providers to small, local, unsophisticated 3PL providers. As a result, suppliers have difficulty obtaining information on the status and allocation of their parts while the parts are stored at the proximity hubs, and manufacturers have difficulty obtaining information regarding their current allocation of parts and the shipping status of these parts. As will be understood by one skilled in the relevant filed, this, along with unpredictable variations in demand, has contributed to the undesirable “bullwhip effect”, which causes manufacturers to request that excessive numbers of parts be maintained at their proximity hubs. This lack of visibility has also made it difficult for suppliers to quickly and effectively re-allocate parts from one manufacturer to another in response to changing market conditions.
The following is a list of selected disadvantages associated with current VMI arrangements:                1. They result in an excessive amount of inventory being stored at the various proximity hubs. This inventory is essentially only available for purchase by those manufacturers nearby. Thus, manufacturers monopolize the inventory, but have no commitment to buy it. Furthermore, manufacturers often over-order to make absolutely sure that they will always have the components that they need. Thus, this situation is not advantageous for the supplier.        2. Revenue realization is delayed for the supplier because ownership of the supplier's goods is not transferred until the goods are “pulled” for use by the manufacturer.        3. The supplier's inventory is fragmented into multiple proximity hubs that are typically run by multiple (small) 3PL organizations. This increases the risk that certain parts may go unused.        4. There is typically no unified inventory visibility once parts are consigned to proximity hubs.        5. It is difficult, using prior art VMI systems, to reallocate consigned inventory based on changes in demand.        6. The demand fragmentation at a large number of proximity hubs reduces forecast accuracy.        7. It is difficult and expensive to aggregate parts using current VMI systems.        8. The overall visibility available according to current, prior art VMI arrangements is typically very low. As a result, even if a supplier had extra parts at one proximity hub, and needed parts at another proximity hub, the supplier would have no way of knowing this.        9. The lack of visibility within current VMI systems leads to a lack of trust by the manufacturers that their parts will arrive on time. This is a further incentive for manufacturers to order more parts from the supplier than they really need, which results in unnecessarily high inventory costs.        10. Because large stockpiles of safety stock are maintained at the VMI, suppliers are exposed to the risk that the stored products will become obsolete while in storage. This is a significant risk in industries, such as the electronics industry, in which parts tend to become outdated quickly.        